24 October 2013
New Burdensome Tax Reporting Requirements in the EU - Is Anyone Taking Notice?
The fight against tax evasion and tax avoidance is high on the international and European political agenda. In Europe, political leaders have made strong commitments to tackle the issue. The debate has attracted a great deal of attention, but until now, little political action. However, one of the more innocuous tax measures proposed could potentially have a major impact on large companies with cross-border EU. The absence of insight from business means this could become an unpleasant done deal…the time to act is now.
Until recently, corporate tax reporting did not make major headlines in European newspapers. Firstly, taxation was seen as a national competence and secondly the wider public viewed it as a complex and remote issue with no impact on their day-to-day lives. However, recent tax scandals involving multinationals as well as the financial crisis changed this situation. Fairness and equality, in the form of fair taxation and burden-sharing by companies to address the financial crisis became prominent issues for governments, citizens and businesses alike.
In line with its international partners in the G8 and G20, the EU publicly declared its commitment to adopt measures to combat tax avoidance and tax evasion. It launched state aid probes into the tax regimes of a number of Member States including Ireland, Luxembourg, the Netherlands and Gibraltar (UK). At the same, the EU increased its efforts on the regulatory front, proposing measures expanding the automatic exchange of tax information as well as measures to increase tax transparency and tackle aggressive tax planning structures. One of these EU proposals – on tax reporting - could have particularly far-reaching implications on large companies active here.
WHAT HAS BEEN PUT FORWARD
In May 2013, European leaders gathered in Brussels and gave a mandate to the European Commission to come forward with a legislative proposal laying down rules for corporate country-by-country reporting (CBCR) of tax and profits. These rules would oblige companies to report such information in detail in their annual accounts and no longer on a merely consolidated basis. For a company with operations across the European Union this could mean significant administrative and compliance costs. Moreover, its tax structure would be made transparent and subject to much more scrutiny by the authorities.
Based on similar obligations already introduced for the banking and extractive industries, the rules could require a company to report the following information on a country basis level:
- Name(s), nature of activities and geographical location;
- Number of full time employees;
- Profit or loss before tax;
- Tax on profit or loss;
- Public subsidies received.
WHAT IS THE STATE OF PLAY?
As there was no sufficient time for a lengthy legislative process in view of the European elections in May 2014, the EU institutions opted for a fast-track procedure by proposing to introduce CBCR as an amendment to the existing legislative proposal on Non-Financial Reporting. This proposal has been under discussion since April 2013. By using the fast-track procedure all the preparatory work that would be normally required could be skipped. In addition, unanimity among all Member States would not be required as the CBCR would be part of a non-taxation legislative document.
The proposal on CBCR is currently being discussed by the EU institutions with the aim to finding an agreement before the EU elections in May 2014. The European Parliament is likely to be in favor of CBCR as it is in general in favor of any tax transparency measures. Early drafts circulated by the Parliament suggest that the CBCR proposal will indeed be far-reaching, extending to the disclosure of information on tax planning arrangements and the general substance of tax advice.
Moreover, this is a particularly good topic for politicians to score some easy points with their base during election campaigns. Likewise, it offers an excellent opportunity to politicians not seeking reelection to bow out on a high note, en passant securing their legacy as a politician who stood up for tax fairness and tax transparency.
EU Member States are approaching the matter with much caution. It is rumoured that countries such as France and Belgium would be in favour of a CBCR measure, whereas the UK and Germany would be against it. However, official positions are yet to be taken, in particular because countries do not want to take measures for which neither the context nor the consequences are well understood. However, at the same time, the political mandate of May 2013 to address CBCR is still on the table.
The EU intends to find an agreement on a binding CBCR proposal before the EU elections in May 2014. This would seem to be a very ambitious timetable indeed. However, even if no detailed agreement can be found before this date, the topic is likely to stay on the political agenda afterwards. Policy-makers could agree on binding commitments now that would oblige them to adopt a measure in the coming years.
It is clear that this topic could pose a significant regulatory risk for many companies active the EU, implying among others potentially huge compliance costs. Therefore, it is worrying that the business community has, so far, been largely absent from the debate. The debate has been predominantly dominated by philosophical concerns, focusing on notions such as fairness and transparency, whereas the practical implications have received little attention. The EU’s decision-makers do worry about this lack of available information on the commercial consequences, but the political pressure to adopt a measure is high.
The need to act is urgent. Business stakeholders should step into this void and stay engaged in the debate. This should ensure that the burden of compliance is well understood, that proposals are pragmatic and reflect the corporate reality. Companies should use political intelligence, build strong coalitions, engage with decision-makers and provide them with specific information on the practical consequences as well as the costs of CBCR. These actions will ensure its voice is taken into account and positive policy decisions are ultimately made.